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Commodity Price Correction Not Over For These ETFs (SLV, USO, JJG, DBA)

January 6th, 2011

On Monday, I warned you that commodities could see a pullback in prices, and that’s exactly what happened. Gold opened at $1,421.10 on the first trading day of 2011, and proceeded to trade as low as $1,364.20 early Wednesday. Oil opened at $91.71 a barrel on Monday, and by early Wednesday had fallen to $88.16.

Wheat fell 2.2% during that same time; corn dropped more than 4%; soybeans fell 2.4%; coffee slipped 4.5%; and sugar lost 5.6% in trading between Monday and early Wednesday.

And yet, some of these commodities made a comeback in late trading on Wednesday. Sugar rebounded 3.87% and oil ended yesterday up 1.42%.

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Even gold closed the day even.

Some folks might think that means this two-day correction in commodity prices is over. I don’t think that’s the case, and I’ll explain in a minute.

There are a few analysts tempering their gains forecasts a bit, though. From CNNMoney:

On average, investment strategists and money managers are predicting oil prices will rise 4% and gold will edge up just 1% by the end of 2011, according to an exclusive CNNMoney survey.

That may seem like a decent increase but consider where prices ended last year. Oil prices rose 15% and gold gained 30% in 2010. In fact, it seemed like gold was setting almost daily records during the second half of the year as the dollar remained under pressure and investors remained wary about the economic recovery.

And yet, some talking heads are calling for gold at $1,800 an ounce and oil at $115 a barrel by the middle of 2011 before selling off.

These two ideas seem to contradict each other, but they don’t, really… It’s a matter of timing.

Here’s why.

Fed Bond Buying Program in Mid-2011

Remember that Fed bond buying program we’ve told you about here in Smart Investing Daily? It’s scheduled to go through mid-2011, buying tens of billions of dollars’ worth of government debt to total $600 billion when all is said and done.

The more debt we add to the system, the less valuable our dollars become, and the more dollars it takes to buy things — like gold and sugar and wheat.

That’s “bullish” for commodities prices at least through the bond-buying program. Will gold reach $1,800 an ounce and oil $115 a barrel? That might be a stretch, though oil did close above $90 a barrel yesterday.

After mid-2011, however, commodity prices may decline. Such high prices would certainly be a heavy weight on our slow recovery’s shoulders.

But let’s get back to the current correction, and why I think we’ve got a bit more room to the downside before commodity prices continue higher.

Take a look at this gold chart provided by Kitco.com.

1-yr-gold-kitco

I’ve added the black lines to show you two things. First, gold appears to have broken its near-term uptrend. Second, the most recent peak failed to make a higher high than early December’s high price. This could signal more downside.

How much? The first point gold could find support would be in the $1,375 range, the point where we saw gold prices start to stabilize on Wednesday. Should this point fail, the next level of support should come at $1,350.

I expect we’ll see gold trade in wide swings between $1,350 and $1,400.

(A scary note: Should support not hold at $1,350, gold could see a correction down to $1,250. I think this is highly unlikely, but I have to tell you what the chart says.)

Commodities at a Crucial Point

Other commodities are also dealing with a key point in their charts.

ipath-dj-ubs-grains

This is a comparison between four commodity ETFs and ETNs.

  • iPath DJ-UBS Grains TR Sub-Idx ETN (NYSE:JJG) tracks the price and performance of futures in corn, soybeans and wheat
  • PowerShares DB Agriculture (NYSE:DBA) currently tracks futures in coffee, cattle, cocoa, and sugar
  • United States Oil (NYSE:USO) follows the spot price of West Texas Intermediate crude oil
  • iShares Silver Trust (NYSE:SLV) reflects the price of silver

Silver and grains have outperformed other commodities this year, but all four “sectors” have seen a pullback thus far in 2011. Now, all four of these ETFs are testing key points of support from back in late November. (Silver is testing support from mid-December.)

Like gold, I believe these commodities could (and probably should) see a deeper correction.

As I noted in Monday’s article, I’m going to be following agricultural commodities, looking for an opportunity.

The two I’ve highlighted in today’s article are at the top of my list: the iPath DJ-UBS Grains TR Sub-Idx ETN (NYSE:JJG) and the PowerShares DB Agriculture (NYSE:DBA).

Though the DBA was designed to reflect the performance of the entire agricultural sector, it’s heavily weighted in “softs,” or things like coffee and sugar. The JJG follows only three grains — corn, wheat and soybeans.

These two could provide a complete picture of the agricultural sector, and I’ll be watching these two very closely over the next couple of weeks.

Written By Sara Nunnally For The Taipan Publishing Group

As Senior Research Director, global correspondent and co-editor of Smart Investing Daily, Sara has traveled all over the world in search of the best investment opportunities to recommend to her readers, be they in developed economies like France and Italy, in emerging markets like the Czech Republic and Poland, or in frontier terrain like Vietnam and Morocco. Her unique “holistic” approach of boots-on-the-ground research has given her an edge in today’s financial marketplace as she searches for the next investment opportunities in hot sectors like alternative energy, currency markets and commodities.  Sara Nunnally’s diverse background includes studies in history, computer science, literature and financial research. She has appeared on news media such as Forbes on Fox, Fox News Live, Bloomberg and CNBC’s Squawk Box, as well as numerous radio shows around the country.

Article brought to you by Taipan Publishing Group, www.taipanpublishinggroup.com.


NYSE:DBA, NYSE:JJG, NYSE:SLV, NYSE:USO


 

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